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What Business Are We In?While the Rocket Science press juggernaut moved inexorably forward, a few troubling facts kept trying to bubble up into my consciousness. The company was founded to build games with embedded video to bring Hollywood stories, characters, and narratives to a market where “shoot and die” twitch games were in vogue. But underlying the company’s existence was a fundamental hypothesis we refused to see or test – customers would care if we did.

In the game business of the early 1990’s video was at best a brief narrative, a distraction you maybe watched once, not the core of the game. Our potential customers didn’t seem to be calling for Hollywood stories, characters and narrative. That’s OK, because we knew better. We thought we had figured out what the next generation of games was going to be. We were thinking we were in the movie business, but video games were more akin to pinball; both pinball and movies were entertainment but you would never confuse them with each other. Successful pinball companies didn’t hire Hollywood talent.

Meanwhile our company was pouring an enormous amount of dollars into building tools and video compression technology, while also hiring a lot of high-priced Hollywood talent like art directors, and script and story editors.

We Don’t Need Domain ExpertsWhen I looked around at our executive staff, there wasn’t a single founder who was a gamer. Worse, there wasn’t a single person on our executive team who had come from a game company. Nor was there anyone with game experience on our board. As the company grew a sense of unease started gnawing at the outer fringes of the “you’re in trouble” part of my brain. Meanwhile my partner was in heaven working with his newly hired group of game designers directing and producing our first games. When I pointed out my rising apprehension his response was, “I’ve been playing games since I was 10. I know what’s great and what’s not. We agreed this part of the company was my responsibility. Don’t worry the games are going to be great.” Given my fiduciary responsibility to my board and my investors did his blasé answer force me to grab him by the collar and scream, “Snap out of it, we’re in trouble!”

Nah. Instead I said, “Oh, OK, glad it’s all under control.” Then I went back to raising more money and getting more press for our soon to be spectacular games.

Hire Advice I Can IgnoreBut the nagging little voice in the back of my head that said, “This doesn’t feel right,” wouldn’t go away. So I hired a VP of Marketing from Sega, one of the video game platforms on which our games would run. After only two weeks on the job, he came into my office and said, “Have you’ve seen the games we are building?” What kind of question was that? Of course I had seen pieces of the video we shot and beautiful storyboards. “No,” he insisted, “Have you seen the game play, the part that supposed to keep players addictively glued to the game console for hours?” Hmm. “No, not really, but my partner owns the studio and tells me it’s spectacular and everyone will love it. Don’t bother him; he knows what he’s doing. Go spend some time outside the building talking to potential distribution partners. Tell them how great it’s going to be and see how many pre-orders we can get.”

A month later the VP of Marketing appeared in my office again. “Steve I have to tell you some bad news, I just showed our potential channel partners and customers a few completed pieces of the games we had. They think the games stink.”

Now I know I heard his words because years later I can still remember them well enough to write them down. But somehow the translation between my ears and what I was supposed to do with what I was hearing shut down. Was my response to stop development of the games? Bring in some outside professionals to review our progress? Call a board meeting and say we may have a serious problem? Nah. I said, “That can’t be true! The press is saying we are the hottest super group around. Look, we’re on the cover of Wired magazine. They think we’re brilliant. Our VCs think we are visionary. Stop annoying our game designers and start working on selling and marketing the games.”

HindsightIn hindsight it’s easy to laugh. Saying you knew how to build great games because you played them all your life was like saying, “Hey I eat out a lot so why don’t I open a restaurant.” Or “I’ve seen a lot of movies so let’s start a movie studio.” Only in Silicon Valley could we have got funded with this idea, and not surprisingly, it was our technology that had the VC’s confused. It was more like we had invented the world’s best new kitchen utensils and wanted to open a restaurant, or had built the world’s finest movie cameras and wanted to start a movie studio. Our venture backers and our executive team confused our technology and our tools — and our passion for the games business — with any practical experience in the real business we were in. We were an entertainment business – and not a very subtle entertainment business. As we were about to find out, if video game players wanted a cinematic experience, they went to the movies, they didn’t buy a video game. Our customers wanted to kill, shoot or hunt for something. Fancy video narratives and plots were not video games.

Interest Alignment
Why VC’s invested in companies like ours is what’s great and bad about entrepreneurship. A Venture Capitalist I respect reminded me that he thought about investment risk as either:

investing $1 million in 10 companies and have all ten succeed. With each of those ten companies returning 2x their money for $20 million. Or

investing in 10 companies and having 8 fail – but the remaining two companies returning 20x their money for $40 million.

His point was that it was in the VC’s interest in having entrepreneurs swing for the fences.

However the VC’s are managing a portfolio while you, the entrepreneur are managing one company – yours. While VC’s might love you and your firm, a 2x return isn’t why they’re in business. It’s nothing personal, but your interests and your VC’s may not be aligned. (More on this in future posts.)

The Search for the Black Swan
What keeps founders and their investors going is the the dream/belief that your startup will be the Black Swan – a company that breaks all the obvious rules, ignores tradition and does something unique and spectacular and with a result that is unpredicted and financial returns that are breathtaking.

Think of the Microprocessor, Personal Computer, Internet, Twitter, Youtube, Facebook, Google, the iPhone. Creating those technologies and companies required entrepreneurs willing to follow their own vision and convincing others that the path is worth following.

The mistake isn’t having a vision and taking risks. The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.

Customer DevelopmentThere was nothing wrong about Rocket Science having a vision radically different than the conventional wisdom. We could have been right and invented a new form of gaming and entertainment. What went awry was continuing to execute on the vision when all the evidence in front of us told us our hypothesis was wrong. We compounded the problem when we failed to have an honest discussion about why it made sense to ignore the evidence. (A tip-off is when you start saying, “they just don’t get it yet.”)

At Rocket Science, hubris took over and was about to lead to the fall.

Customer Development says having a vision, faith and a set of hypotheses are a normal part of the startup experience. But it is critical to build in a process for testing those hypothesis outside the building and listening to the responses – or you might as well throw your money in the street.

Lessons learned?

While a lack of relevant domain expertise is not always fatal, believing you don’t need any is.

Founders need to validate their vision in front of customers early and often.

Your goals and your VC’s goals may not be aligned. Make sure they are.

8 Responses

This is an excellent post. Your point about the VC portfolio model vs. the entrepreneur’s “portfolio of 1” is one I’ve been thinking about for a long time, and have also discussed with many other entrepreneurs. I’ve discussed this with VCs and the ratios for the VC’s portfolio can be even greater (in some cases, only 1 success out of 100 but with extraordinary returns for the 1).

The entrepreneur might be very happy with a modest outcome where the VC is more incented to swing for the fences or fail. I’m really looking forward to your next post on this.

Fantastic experiential wisdom gleaned from a startup that crashed and burned. If for no other reason Steve you’ve convinced me to keep on pushing forward with my own business ideas. My hope that of course I can leverage the knowledge of generous titans like yourself to maximize my opportunity for a grand slam company.
Great blog setup by the way, enjoying the narrative/play by play including ignoring your nagging (rational) fears.

I’m enjoying the series, but I have one quibble: I think founders should validate their *execution* in front of customers early and often. Vision and $1.65 will get you a cup of coffee (and maybe some VC funding).

It seems to me that at least YouTube should not be in the list. It never made a single penny and still does not, it only made huge cash outflows and liabilities. The fact its board members sold it to their former portfolio company does not make it a great business, it makes it a great investment.

Li Kramer gave me the link to your blog. Great series and history but I think you take to much personal responsibility for Rocket Science failure. If I look back at the time we lived in then the whole gaming industry was on explosive growth and looking for the next wave of content to fill the new generation of hardware. The whole idea of a cinematic experience in games wasn’t just hype, just look at today’s games, and everyone in the food chain was caught up on the possibilities and didn’t want to miss being on board first. Most of the problem was there was no real game play in the games being developed but it also turned out that there really was no hardware to support them even if they where good. Sega CD was a flop so who knows what would have happened even if we had a winner. Quick acquisition by a Sega or EA I suppose.

Glad to be acknowledged as the voice of reason. My only regret is not looking at the games more closely before joining but there really was nothing to see at the time. My “Epiphany” came at some early meeting and was shown Flying Aces? The one that was going to be in Black and White. Now I am no gamer but the whole idea of the new platform was new leading edge technology and this game is in Black and White!!!! The second was the consumer focus group we did on Loadstar. Universally hated. Good thing there where no sharp objects in the booth. Not sure whether you would have killed yourself or the development group.

Personally I got what I deserved. I left Sega and joined in the hopes of catching the Golden Ring and what I learned is nothing substitutes for just working hard.

I was making games at EA at the time Rocket Science launched. There were a lot of changes in the gaming business and it was making the transition from a niche hobby into the mainstream.

However, we kept seeing people at EA who pitched ideas to us that not only didn’t understand gaming, but didn’t understand computers well enough to see that what they were pitching was ridiculous.

For example, when CDRoms started to come out, there were lots of people who were convinced that “everything was going to change” because of them. You could explain that, while you had access to more storage space per game, you were still running on the same Intel chip with the same graphics board. It didn’t matter, people “believed” and didn’t want to hear any different.

Eventually, games that depended only on CDRom for their differentiation fizzled out, as people saw that the access times for all that data made the games a painful experience. The CD became the way to get lower COG because it replaced a bunch of floppies in the box.

And then every few years, another technology fad would pop up, and people who had never worked on games in their lives decided that they knew better than we did and tried to tell us how they were going to change everything. Rocket Science was just another one of those companies (with better PR).

However, thanks for describing the experience inside the company. As I work with a startup, this blog is very helpful.

[…] videogame company, Rocket Science, was slowly dying. Hubris, bad CEO decisions (mine) and a fundamental lack of understanding that we were a “hits-based” entertainment business instead of a Silicon Valley technology […]